data driven quality management: the value of achieving ......operational excellence quality leaders...

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© 2016 LNS Research. All Rights Reserved

August 2016

www.lnsresearch.com

Quality leaders in manufacturing

companies today are facing new

challenges and opportunities presented

by changing global markets, disruptive

technologies, new regulations, and

social media. Unfortunately, quality

management maturity has plateaued,

preventing quality management from

effectively addressing these

challenges.

Quality management is stuck in a catch-22. The investments that market leading

organizations have made in quality allow them to more clearly see the benefits of

quality, leading to continued investments. Conversely, companies with siloed and

fragmented quality—the majority of industry—cannot generate the internal metrics

and proof of value, reducing and slowing investment. Leaders in these

organizations need strategies, tools and data to establish the value of quality to the

organization.

This is an important problem to solve. According to the LNS Quality Management

survey, 87% of Quality leaders identify that their inability to improve operational

excellence—people, process, and technology best practices—is a top challenge in

meeting market trends. LNS Research has quantitatively shown that this inability to

improve Operational Excellence is directly connected with a lack of top executive

sponsorship. Long-term executive sponsorship means top-down support, executive

voice, and sustained resources, which are the three elements that quality needs to

thrive. Most quality leaders have not been able to garner this level of executive

support.

While value engineering activities can result in a calculated ROI of a specific best

practice using a narrowly targeted metric, these activities cannot credibly use

broadly applicable operational or financial metrics. For instance, while value

engineering can believably predict that adopting a corporate-wide corrective action

process might reduce non-conformances, these activities are insufficient to

connect corrective action improvements to On Time Delivery (OTD), Overall

Equipment Effectiveness (OEE), or Cost of Poor Quality (CoPQ). Unfortunately,

there has also been little published data that quantifies the benefits of improving

quality management maturity or the measurable impact of adopting specific best

practices on these broader metrics.

Research Spotlight

Data Driven Quality Management: The Value of Achieving Quality Maturity

Quality management

is stuck in a catch-22.

The investments that

market leading

organizations have

made in quality allow

them to more clearly

see the benefits of

quality, leading to

continued

investments. Leaders

need strategies, tools

and data, to establish

the value of quality to

the organization.

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Research Spotlight


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Quality leaders across industry need guidance to gain executive sponsorship by

clearly communicating the value of both quality management and specific quality

management best practices in a manner that will resonate with executive sponsors

and cross-functional leaders. This Research Spotlight will discuss:

A quality maturity definition, why quality maturity is important to quality

leaders, and how top executive sponsorship for quality management

impacts quality maturity

Strategies to improve quality maturity across people, processes, and

technology

The measurable impact of improving quality maturity on quality, operational,

and financial metrics

The measurable impact of specific selected quality management best

practices on quality, operational, and financial metrics

How to create a business case journey that progressively improves quality

maturity, nurtures executive sponsors, and improves corporate

performance

While quality leaders are faced with many challenges and priorities, LNS Research

has identified that executive sponsorship is the single most important element to

quality management maturity. The data in this report helps to address the lack of

published benefits driven from quality maturity and specific quality best practices.

LNS Research encourages companies to use the data contained in this report to

build executive business cases and improve quality maturity.

LNS Research has

identified executive

sponsorship as the

single most

important element to

quality management

maturity.


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Demographics

It is important to set the stage for the supporting data used throughout this

Research Spotlight. The LNS Research Quality Management Survey has been

completed by over 700 executives and other senior leaders coming from a variety

of company sizes and geographies across a range of industries. The survey

questions drill down into the challenges and opportunities that companies face,

strategic objectives data, and the most important goals currently being pursued

around quality.

There were 45.9% of companies from batch manufacturing industries, with the

remainder coming from discrete, and process manufacturing. Nearly half were from

North America, followed by just under a quarter from the Middle East and Africa.

Almost half, 44.9%, were from small companies, with 38.8% from large companies,

and the remainder from mid-sized companies.


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Journey to Quality Maturity

What Is Quality Maturity?

LNS Research has long held the

stance that the correct way to view

quality management is through the

lens of Operational Excellence: an

organization’s adoption of people,

process, and technology best

practices. While these are

described in detail in other LNS

Research publications, it is

important to realize that all three of

these elements interconnect, and

that any change to one element

will also impact the other two.

Therefore, in order to maximize the

impact of quality investment,

quality leaders must optimize

across these three elements.

LNS Research’s Quality Maturity

Model provides a perspective that connects Operational Excellence with the ability

to meet market demands. Organizations can use the maturity levels both as a

yardstick to measure their current maturity, as well as a method for guiding future

investments. Comparing the performance at Level 1 (Ad Hoc) versus Level 5

(Market Leader) provides clear impact of quality maturity.


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Quality and Strategic Objectives

Quality leaders must think outside departmental goals and communicate impact in

terms that resonate with the audience—leaders from other functions and top

executives. Those looking to achieve Market Leader quality maturity must attain

top executive sponsorship in order to shift the culture from “quality is a department”

to “quality is a cross-functional responsibility.” This shift can begin with a

movement in quality’s objectives.

While quality must ensure that companies efficiently meet quality compliance and

conformance requirements, other functions and top executives do not often have

KPIs or objectives tied to compliance and conformance. In level 1 companies, for

example, data may be siloed in paper-based systems or disconnected

spreadsheets. Only after maturing into a data-driven environment with a single

source of available data can they utilize best practices with before and after

measurement of KPIs. Quality leaders must discover the KPIs and objectives of

cross-functional leaders and top executives, determine how quality can help

accomplish these objectives, then communicate the alignment of quality with these

objective using the appropriate metrics.

Quality leaders should determine if other leaders and top executives have

objectives to improve customer service, OTD, and/or manufacturing performance.

Is there an Internet of Things (IoT) initiative under way? Expressing the impact of

quality in terms that resonate with the target audience leads to joint planning,

sponsorship, and extension of quality more broadly across the organization. As a

result, the people, process, and technology practices of quality will be improved

such that all related functions can work together more effectively to accomplish

objectives.

Operational Excellence Strategies to Improve Quality Maturity

LNS Research has analyzed best practices across people, processes, and

technology and determined that the following strategies have the most significant

impact on quality management maturity.

People: As stated earlier, the single most important factor in quality management

maturity is attaining top executive sponsorship. LNS analyzed adoption of 28 best

practices and found that those that identified that quality is a top executive priority

adopted an average of 2.9 times as many best practices than those that did not.

This has a significant impact on a company’s standing versus its peers; when

analyzing the adoption of quality management best practices across industry,

those with top executive sponsorship averaged in the second highest quintile of


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best practice adoption, where those without executive sponsorship averaged in the

second lowest quintile. Top executives force cross-functional engagement, which

drives Operational Excellence improvements.

Process: Organizations should emphasize deployment of cross-functional

processes. In ensuing sections of this report, there are many specific examples

that quantify the impact of cross-functional best practices. However, analysis

across all best practices identifies that paper-based standalone processes provide

demonstrably lower performance than cross-functional practices.

Technology: Leaders should leverage appropriate technology to enable cross-

functional processes and enterprise visibility. Emphasis should be placed on

technology that enables cross-functional collaboration with internal and external

stakeholders, technology that automates/manages processes, and technology that

provides real-time metrics.


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Metrics: The Language of Improvement

Metrics are the language used to express expected benefits, and care should be

taken to ensure that they convey the value in terms that will credibly resonate with

the audience. Choice in metrics can express the expected value of an

improvement. For instance, selecting metrics that measure the success of an

individual department can communicate that the activity is of primary interest to

that department, and may not have broader applicability to other functions, or the

corporate at large.

Additionally, the metrics chosen can drive unexpected consequences. As an

example, justifying an investment based on greater departmental efficiency may

require elimination of departmental manpower, which is likely not the desired

outcome. Expressing the same investment in terms of improved OTD, OEE, and so

on shows a positive and likely cross-functional impact, and does not require

elimination of positions. LNS has defined five classes of justification metrics shown

below arranged in order of ascending strategic importance.

Metrics are the

language used to

express expected

benefits, and care

should be taken to

ensure that the

convey value in

terms that will

credibly resonate

with the audience.

LNS has defined five

classes of

justification metrics

in order of

ascending strategic

importance.


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Advance Strategic Goals Through Mature Quality

Operational Excellence

Quality leaders need to select the appropriate people, process, and technology

best practices that will drive value, improve Operational Excellence maturity, and

connect quality across functions. They must also need to demonstrate the value of

these best practices in a credible fashion.

The following sections provide the benefits associated with selected best practices.

The best practices are organized by metric and objective type, along with data

generated by LNS Research to quantify the average improvement in performance

achieved by companies that have deployed these best practices.

Siloed Metrics and Departmental Scope

Organizations that are at Level 1 or 2 Quality Maturity often use siloed metrics and

most often develop business cases of a departmental scope. Quality leaders at

Level 1 and Level 2 are often still optimizing quality department-specific best

practices. At this stage of maturity, LNS recommends identifying best practices that

are easier for quality teams to deploy without large amounts of cross-functional

engagement. Demonstrating success with these best practices will position quality

leaders for later cross-functional success.

LNS Research tracks a number of siloed metrics and best practices that do not

require extensive cross-functional engagement. These are broken out by objective

below. All metrics compare average performance of those that have adopted a

specific best practice to the average performance of those that have not.

Objective: Reduce Customer Complaints

Process Best Practice:

• Reduce complaints by an average of 78% by adopting a standardized

escalation process for supplier quality and non-compliance events

Technology Best Practices:

• Reduce complaints by an average of 29% by automating Complaint

Handling with software

• Reduce complaints by an average of 69% by providing real-time

visibility to quality metrics in manufacturing


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Objective: Increase First Pass Yield (FPY) / Reduce Scrap and Rework

Technology Best Practices

• Increase FPY by an average of 5% by automating Hazard Analysis &

Critical Control Points (HACCP) with software

• Increase FPY by an average 4% by automating Risk Management with

software

• Increase FPY by an average of 3% by deploying Enterprise Quality

Management Software (EQMS)

Objective: Reduce Supplier Defect Rate (SDR) / Improve Supplier

Quality


• Reduce SDR by an average of 46% by standardizing the escalation

process for supplier quality and non-compliance events


• Reduce SDR an average of 45% by collecting supplier quality data

automatically through a Web-based portal

• Reduce SDR by an average of 19% by providing real-time visibility of

quality metrics in supplier performance

Operational Metrics and Cross-Functional Scope

Organizations that are at Level 3 leverage operational metrics and most often

develop business cases of a cross-functional scope. Quality leaders this level

should deploy cross-functional best practices. At this stage, LNS recommends

increasing focus on cross-functional engagement to continue to expand out of the

silo and gain cross-functional traction.

Objective: Increase OEE


• Increase OEE by an average of 3% by including suppliers in Design for

Quality initiatives


• Increase OEE by an average of 10% by automating Supplier Quality

Management with software

• Increase OEE by an average of 9% by automating Audit Management

with software


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• Increase OEE by an average of 8% by automating Production Part

Approval Process (PPAP) with software

• Increase OEE by an average of 7% by automating Advanced Product

Quality Plan with software

Objective: Improve OTD

Process Best Practices:

• Improve OTD by an average of 8% by adopting formal, company-wide

NC/CAPA process

• Improve OTD by an average of 8% by adopting closed-loop processes

to connect quality across design, manufacturing, and suppliers

Technology Best Practices

• Improve OTD by an average of 8% by enabling visualization of risk

factors across operations

• Improve OTD by an average of 7% by automating and integrating

Environmental, Health, and Safety (EHS) systems with EQMS

• Improve OTD by an average of 7% by automating PPAP with software

Financial Metrics and Cross-Functional Scope

As quality organizations continue on the business case journey, one common goal

is to drive business cases based on the Total Cost of Quality (TCoQ). One

commonly accepted definition of TCoQ comes from the American Society of

Quality. In this definition, TCoQ = Cost of Poor Quality (CoPQ) + Cost of Good

Quality (CoGQ), where CoPQ = CoPQ-Internal + CoPQ-External, and CoGQ =

CoGQ-Appraisal + CoGQ-Prevention.

This definition is widely used, and LNS Research uses it to survey TCoQ from the

field. However, relatively few respondents have the ability to effectively and

accurately generate TCoQ data. This is partially due to quality maturity – low

maturity organizations lack data-driven systems to collect TCoQ data - but also

because of the challenges that organizations have in practically applying the

definitions of CoPQ and CoGQ. For instance, in a quality test lab, dividing the labor

and capital equipment costs between CoPQ and CoGQ can be difficult and time

consuming when one considers that the quality lab may be used for CoGQ-

Prevention as well as for CoPQ-Internal and CoPQ-External costs.


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Quality leaders should consider how TCoQ will be defined, measured, and

reported. LNS Research suggests defining TCoQ in such a way that it can be

effectively used as a management metric. One possible definition follows:

Total Cost of Quality (TCoQ) = Planned Cost of Quality + Unplanned Cost of

Quality

Planned Cost of Quality: This is the “quality budget,” and like any budget, it

includes planned capital expenditures as well as operational expenditures, and is

reviewed annually. The budget should include the quality department personnel as

well as equipment used by quality, without having to separate these by their

intended use. This should not include quality costs incurred by other functions in

performance of quality activities, as this will increase effort to deploy and manage.

Recall that quality should be a responsibility, not a department.

Unplanned Cost of Quality: This is everything outside of the established quality

budget. This includes costs incurred to address quality failures and events, as well

as unplanned investment in new resources. Examples include costs associated

with scrap, rework, corrective actions, and recalls. Of course, these costs can be

projected, but they should not be included in the Planned Cost of Quality because

they are not planned. This is where a company should consider the labor costs that

came from unplanned cross-functional engagement. Other departments could

effectively send a “bill” to quality for these unplanned activities. In order to aid

reporting and Operational Excellence decision making, the next tier of the cost

breakdown structure could follow the corporate Operational Architecture.

Value Metrics and Executive Scope

A prevailing opinion in industry is that the most strategic metric for quality is Cost of

Quality. Indeed, this surely is a strategic metric as it impacts the bottom line;

however, quality has a top line impact as well, which has increasingly come into

focus. Many companies, from small to multi-nationals across industry, are

increasing emphasis on quality as a means to generate progress against top line

objectives.

Leaders should target Value of Quality as the ultimate method to express the

projected impact of quality management, as it most closely connects quality with

corporate success. The Value of Quality is expressed in terms of the impact of

quality management to corporate top line, using metrics such revenue growth,

penetration into new markets, market share, and so on. Percentage successful

New Product Introductions (NPI) is a metric that closely aligns with the Value of

Quality, as successful new products are closely aligned with revenue growth and

market share.


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The Business Case Journey

The elements of quality management maturity, objectives scope, business case

scope, and metrics are inter-related. Companies that are low maturity have

difficulty progressing to higher levels of maturity because of challenges

communicating value and securing executive sponsorship. However, by

recognizing the relationship between these concepts, and by building a plan to

increase maturity, quality leaders can gain executive sponsorship, nurture

executive sponsorship through increasingly impactful best practice deployments,

and arrive at a much higher maturity.

The business case journey graphic is a tool that supports development of this plan.

Leaders can use it to map a course from the initial as-is state to the ultimate to-be

state through a number of progressively more mature steps.

However, leaders may need assistance identifying the value of adopting quality

best practices. What is the value of quality maturity? To answer this question, LNS

Research captured the adoption of quality best practices across industries

(N=1,199), as well as the performance of these companies across several common

metrics. The companies were divided into quintiles according to their adoption of

best practices, where the first quintile included the 20% that had adopted the most

quality best practices and the fifth quintile included the 20% that had adopted the

fewest best practices.


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It is clear that increased quality best practice adoption results in increased

performance. Note that “Total Cost of Poor Quality” is a sum of Cost of Poor

Quality-Internal and Cost of Poor Quality-External, and is expressed as a

percentage of revenue.

Recommendations and Actionable Next Steps

Quality leaders looking to differentiate their companies must look beyond process

definition and training, and increase their maturity across all three legs of

Operational Excellence: people, processes, and technology. LNS Research data

shows that companies which have increased their quality maturity by adopting

quality management Operational Excellence best practices have improved

departmental, operational, and financial performance. LNS Research data also

quantitatively identifies the impact of specific best practice adoption on metrics and

objectives.

LNS Research recommends that organizations:

• Align quality with strategic objectives in order to create increased

relevance across functions and with top executives

• Deploy people, process, and technology strategies that drive increased

maturity. Specifically:

o Plan, gain, and nurture executive sponsorship, as those

organizations where quality is a top executive priority have roughly

triple the number of quality best practices deployed


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o Focus on deploying cross-functional processes, being sure to use

opportunities to gain alignment and support from cross-functional

stakeholders

o Leverage technology that supports cross-functional processes and

creates enterprise-wide participation in quality processes and with

quality data

• Leverage the appropriate metrics to ensure that the language of

improvement is meaningful to the audience

• Identify best practices that provide quantifiable progress towards

important objectives, as measured by appropriate metrics

• Use the quality business case journey to plot a course from the initial as

is state to an ultimate to be state

• Plan, gain, and nurture executive sponsorship using the executive

business case. This executive business case should internally message

the value of quality management through a master business case

LNS Research provides advisory and benchmarking services to help Line-of-Business, IT, and Industrial Automation executives make critical business and operational decisions. LNS research focuses on providing insights into the key business processes, metrics, and technologies adopted in industrial operations.

Author:

Dan Jacob, Research Analyst, [email protected]

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